What is Cash Flow Projection?
A Cash Flow Projection is a forward-looking document that makes predictions about the cash inflows and outflows of a business to analyze the future capital requirements, identify bottlenecks in the processes, and evaluate cash availability for future projects.
Cash Flow Projection is an essential activity that makes predictions about the company’s income from the sale of goods & services, interest earned, and sale of assets. It also makes predictions about expenditures such as manufacturing costs, marketing charges, bill payments, and employee salaries. It is an essential process to fuel business growth in the long term.
How to Calculate Cash Flow Projection?
Now, let us discuss the easy steps to calculate the cash flow prediction.
Step 1
Firstly, find the amount of cash for the beginning of the period. Calculate this by subtracting the expenses of the previous period from the income.
Cash at the Beginning of the Period = Previous Period’s Income – Previous Period’s Expenses
Step 2
The next step is to predict the amount of cash that is expected to come in the next period. Revenue, sales, made-on credit, loans, etc. are some expected income. Refer to the previous cash records, and document any changes that are different from previous records.
Step 3
In the third step, provide an estimation of the expenses that are likely to occur in the next period. Consider all the expenses such as raw materials, rent, utilities, insurance, and other bills to be paid.
Step 4
The fourth step is to calculate your business’s cash flow by subtracting your estimated expenses from the estimated income.
Cash Flow = Estimated Income – Estimated Expenses
Step 5
In the final step, add the cash flow to your opening balance. This will give you a closing balance also. This closing balance is taken as a starting balance for the upcoming fiscal period.
Layout of Cashflow Projection
To create a layout for the cash flow forecast, you will have to draft out columns for the future period if you want to create your cash flow projection. It is better to take advantage of the spreadsheet to organize your cash flow forecasts.
Here’s a list of categories to include in your cashflow forecasting:
- Opening Balance: Indicates the amount of cash and cash equivalents at the beginning of the predefined period (such as a month, quarter, or year)
- Cash Inflow: Indicates the amount of cash coming in from sales, loans, investment revenues, etc.
- Cash Outflow: Indicates the amount of cash going out as part of raw material payments, wages, salaries, bill payments, etc.
- Cash Uses: Lists the expenditures such as marketing, materials, and research.
- Period Cashflow: Indicates the amount obtained by subtracting the total cash outflows from the total cash inflows.
- Closing Balance: Indicates the amount of cash and cash equivalents at the end of the predefined period (such as a month, quarter, or year)
- Duration Period: Indicates the duration in terms of a month, quarter, or year.
Example of Cashflow Forecasting
Here’s an example of Cashflow Forecasting that shows the cash coming in and going out for 3 months. All the figures in our example are hypothetical.
Example Cash Flow Projection for the XYZ Company:
Quarter: April – June
| Description | April | May | June | Total |
| Cash Inflows | ||||
| Opening Balance | 50000 | 82000 | 115500 | – |
| Sales Revenue | 100000 | 120000 | 150000 | 370000 |
| Investment Income | 5000 | 5000 | 5000 | 15000 |
| Total Inflows | 155000 | 207000 | 270500 | 385000 |
| Cash Outflows | ||||
| Rent | -20000 | -20000 | -20000 | -60000 |
| Salaries | -50000 | -50000 | -50000 | -150000 |
| Utilities | -10000 | -10000 | -10000 | -30000 |
| Marketing | -15000 | -20000 | -25000 | -60000 |
| Inventory Purchase | -30000 | -25000 | -50000 | -105000 |
| Total Outflows | -125000 | -125000 | -155000 | -405000 |
| Net Cash Flow | 30000 | 82000 | 115500 | -20000 |
| Closing Balance | 82000 | 115500 | 115500 | 115500 |
As you can see from the above Cashflow Forecasting table, the company managed mostly a positive cash flow by the end of June month. This signals a positive financial health.
Strategies to Improve the Accuracy of Cash Flow Projections
Given below are some of the strategies to boost the accuracy of the cashflow forecasts of your business:
- Using ERP system like Sage X3 for cashflow forecasting will provide higher accuracy & useful insights.
- Breaking down your revenue sources to predict future cash inflows is important.
- Frequently update your cash flow projections with updated financial data.
- Use historical financial data when predicting future business performance.
- Scenario planning is vital as cash flow projections should be suitable for any situation.
- It is also vital to track all the invoice payments to predict the cash flow forecasts precisely.
- Seek the help of finance professionals to validate the cash flow predictions.
Benefits of Cash Flow Prediction
Why are an increasing number of businesses focusing on cash flow forecast? Here are the possible reasons:
1. Identify Cash Availability
A healthy cash flow is the lifeblood of every business. Without a healthy cash flow, a business risks disruptions in the day-to-day business activities. Cash Flow Prediction allows businesses to identify requirements for cash and keep adequate cash & cash equivalents in the future.
2. Plan Business Activities
Businesses need to reserve sufficient cash for conducting different activities in the future. Cash Flow Prediction allows businesses to plan ahead of time and smoothly execute activities such as employee procurement, making supplier payments, updating their technology, and investing in different projects.
3. Gain Investor Trust
One of the key indicators of a financially sound organization is sufficient availability of funds to sustain its operations. Cash Flow Prediction allows investors, suppliers, and employees to gain an understanding of the company’s ability to make repayments in the future. A positive Cash Flow Projection develops a deep understanding and trust.
4. Optimize Business Strategies
Cash Flow Prediction helps businesses understand the future inflow of the cash coming in, and the future outflow of cash going out. This allows decision-makers to gain a better understanding of the movement of cash. They can identify the areas of business operations that need improvement, and optimize their business strategies accordingly.
5. Better Receivables Management
Cash Flow Projection allows Management to gain insights into the payments receivable from the customers and find potential bottlenecks. They can take corrective measures to reduce the delays and ensure customers pay on a timely basis.
Challenges in Cash Flow Projection
Businesses may face the following challenges during the cash flow prediction.
1. Forecasting Errors
The primary objective of preparing a Cash Flow Forecast is to forecast the inflows and outflows of cash. However, predicting revenues and expenditures in the long term can be a difficult job and prone to errors. The actual outcomes may not be realistic and the Management risks making incorrect decisions.
2. Tedious Data Management
In a typical business scenario, the data is scattered across multiple departments and teams. Gathering the required data from multiple sources can be a long and tedious job. Additionally, different departments may have variations in the data, leading to further confusion.
3. Data Relevancy
Cash Flow Forecasting is not a one-time process. You will need to regularly check the relevance and freshness of the data and update it if required. Since the financial position of the business keeps changing from time to time, the Cash Flow Projection risks becoming obsolete.
4. Dependency on Historic Data
Some companies may lack access to a broader set of information and depend on historical data for predicting cash flows. The increased reliance on historical data can increase the risk of errors and lead to incorrect forecasting.
5. False Sense of Security
A positive Cash Flow Projection with higher surplus cash can lead to over-optimism about the organization’s future. The decision-makers may become highly optimistic about the company’s growth. They may fail to recognize and address the immediate problems.
How ERP Transforms Cashflow Forecasting
ERP system is a comprehensive business management software that consolidates data from different sources and uses its powerful analytical & data processing features to provide real-time charts, reports, and other intelligence for faster & accurate decision-making.
Now, let us understand how ERP-powered automation is transforming the process of cashflow forecasting.
1. Improved Adaptability
In the earlier stages, it is easier to manage cash flow projection spreadsheets. As your business grows, it will be difficult to manage spreadsheets. An ERP is highly scalable & flexible which adapts to your growing business needs.
2. Saves Time
Automating the Cashflow Forecasting saves a lot of time. With a technology cash flow process involves the following functions: Gather data on cash flow from financial statements, categorizing each transaction. Utilize information on receivables and payables to generate near-term predictions. Develop budgetary and other business projections for intermediate-term planning.
3. Reduces Human Errors
In the cash flow projection, accuracy is paramount. Manually managing the cash flow will open room for errors and too many risks. An ERP promotes data consistency, easy integration with other processes, and easy data validation. Moreover, it is also capable of detecting errors and providing accurate cash flow projections.
4. Identify Potential Impacts
ERP Aggregates information from different operational segments, affiliates, and stock quantities. It merges all gathered information into a unified cash flow forecast. This helps in conducting analysis, identifying variances, and assessing the potential impacts of your decisions.
5. Cloud Computing
Another benefit of implementing ERP in Cash Flow Projection is cloud computing. With the cloud, businesses can access their data anytime from anywhere. They don’t have to worry about data loss due to hardware errors, natural threats, and other circumstances.
FAQs
1. What is the Definition of Cash Flow Projection?
Cash Flow Projection meaning is a statement that makes predictions about a company’s inflows and outflows of cash and cash equivalent. It helps the company in various ways from knowing how much money will be available for future investments and projects, and controlling their spending, to planning their finances.
2. How to Prepare a Cash Flow Projection?
First things first, the company needs to acquire different sets of data such as historical sales data, budget data, marketing data, employee data, procurement data, and so on. Thereafter, the company may use Excel Templates or a dedicated ERP such as Sage X3 to prepare a Cash Flow Projection.
3. What is a Negative Cash Flow?
A Negative Cash Flow occurs whenever the money going outside of the company exceeds the money coming in terms of revenues. If this continues for the long term, the company becomes highly reliant on financing and investing to cover up its expenditures. For example, a company earns Rs. 100,00,000 from sales, but it incurs 150,00,000 in expenditures. Thus, it has a negative cash flow of Rs. 50,00,000.
4. How is a Cash Flow Projection Different than a Cash Flow Statement?
A Cash Flow Projection deals with the future inflows and outflows of cash. In contrast, a Cash Flow Statement records the actual cash inflows and outflows that occurred in the past. The former makes predictions on occasions, whereas the latter documents the current position.
5. How Companies Can Improve the Accuracy of Cash Flow Projection?
There are several ways you can take to improve the accuracy of the Cash Flow Projection. For example, you can keep a detailed log of all expenditures and incomes to ensure the source data is accurate. You may also want to compare your previous forecasting to identify the accuracy rate and take measures to improve them gradually.